InvITs falling below PB Value

Hello! I see a lot of InvITs trading below their book value. Is this a normal occurrence or is there some value to be unlocked here? They also need to be giving great dividends (~15%) which alone is amazing not to mention the capital appreciation that would also be happening.

My theory is that the dividends would hit the stock value as they supposed to give dividends mandatorily, the value of stock would always come down by the portion of the dividend amount.

I’m curious too if there are other realistic reasons .

Remember, INVITS hold depreciating assets so they are not designed to provide capital appreciation. Price might jump in short term due to movement in interest rate, but over long time, Capital appreciation is difficult.
Also, do not get mislead by high dividend yield. This is not dividend in conventional sense, but more like cashflow. Because terminal value of your holding is almost going to be zero, so there is no capital coming back at end of tenure.

Eg. An INVIT that holds Power transmission line, which was built with investment of 1000 crs. This book value is as on day 1, but it keeps on decreasing over the year as asset depreciate. At end of life that asset is almost useless or valued 0.
So cashflow you got over the years should account for dividend as well as 0 terminal value.

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This is the key which explains a PB below 1.

But comparing to REITs, it seems they all seem to have a relatively high PE of 30-60. Meanwhile INVITs are sub 1. They both operate on the same model right? How come one is priced so much differently to another?

How come Real estate is considered appreciating while infrastructure is considered depreciating? Is the value of the REIT all coming from the Land and none from the building infrastructure?

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Learnt something new. Never thought of this in this line. I wonder if this point is mentioned in their brochure for layman investor to understand. Assuming a power transmission line needs to be replaced what will happen to the Invit holder, when the value becomes zero?. In a way the cashflow that is received by an investor represents capital and interest as the Power line will have zero value. Seen many videos on INvit and was tempted to buy as well, but none mentioned this factor.

The risk being someone who do not understand the product in detail, like me till today, will buy when the PB is low assuming I got a good deal and then the Transmission line shuts shop. Goodness. So always buy Invit when it is originally launched and not from the secondary market - is this assumption correct.

Maybe this concept is slightly different with Real Estate Invits as Land will always have some value.

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Hi, genuine question : Wouldn’t the power transmission lines , capacitors, feeders, and any equipment be renewed ? Where’s the value going to 0? I still don’t get it.

Some of the contracts the PGInvIt hold are 28 years or higher. This may or may not involve the Complete renew of the infrastructure but till their contract the updates and maintenance happens.

Also, PGInvIt may also look for new opportunities in rest of the India , place bids , win or lose contracts.

I’m saying PGInvIt as an example only, I was also looking for an InvIt recently as well.

Aren’t ports operate the same way? Adani , JSW and few others take a contract to operate the port shipments for a long duration.

Couple of differences in both models:

  1. As you rightly pointed out land. Most people believe land (and to some extent even buildings) to be appreciating assets. And hence are willing to accept lower cashflow from REIT.
  2. Rental contracts in itself are designed as appreciating contracts with in-built provision of escalations. So if rent is 100 today, after 3 years it will increase to 110 and so on. Thus
    most REIT have appreciating cashflows. On other hand INVIT have contracts designed in such a way that cashflow reduces over period. So if it is getting 100 as rent for transmission line, it will be 95 after 3 years and so on.
  3. REIT also has additional scope of appreciation through future development potential. Most assets they hold have scope for additional development (adding few floor or 1-2 new building in complex). This gives additional avenue to income growth. This is generally rare for INVIT.

All in all this limits appreciation possibility of INVIT. There is always a possibility that INVIT can buy more assets and grow its cashflow. But on same asset basis, it is difficult for INVIT to grow its cashflow, relative to REIT.
Hence REIT are generally traded at premium (or lower yield) compared to INVIT

Not that pessimistic. :slight_smile:
INVIT is a great product, don’t get me wrong. I personally invest in INVIT heavily. But you need to have your expectations right.

If you are buying an INVIT today which is yielding 11%, you should not be comparing it with bond giving 7% and feel that you are getting 4% extra.
Till the time you understand that 11% today might become, 10 after few years, and 9 after few more, and over a long period of time you will be getting less capital back then what you invested, then it is fantastic.

If you feel I have invested in bond giving me 11% every year, and I will get back my capital, then there is a fundamental problem.

Yes that is the fundamental feature by design. And that is why you are getting 3-4% premium in yield.

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Umm, not really. Typically this power transmission lines (or any capital assets) are designed for 30 years and that is their useful life. Once the contract is over, that asset is useless and yields no cashflow.
You might sell it in scrap and get some residual value, but it will be fraction of actual capital used to build it. So more or less 0 at end of life.

Consider road assets. Govt gives road for toll collection for a fixed period, and after that period, it is returned to govt (or toll collection stop). Once that happens, its value for INVIT is 0. They aren’t getting anything back.
This is what happened with IRB INVIT where couple of their major earning road asset’s, license ended. And that shows up in price.

yes that option is always there, but for that to do, they will have to raise new money from new investors. Remember INVIT does not hold cash on its balance sheet, so any new acquisition requires new capital, diluting existing investors.
Indigrid has been doing this brilliantly. PGINVIT is struggling to do this. And hence if you see, Indigirid is trading at premium to PGINVIT right now.

Point I am making is the asset they hold are depreciating assets and their end of life value tends to zero. So there is no capital coming back, end of life.

There are no listed INVIT yet in this space, so no idea.

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Few points and One question…

For an InvIT to expand by acquiring new Transmission or Power Generation assets, it is not necessary that they have to dilute the equity, they can do that using debt.
PGInvIT intense to do this i.e. expansion by using debt. And they haven’t used their debt capacity.

The problem with PGInvIT is that after introducing the first power transmission infrastructure investment trust government change the policy from BOOM to BOOT for future acquisition of transmission assets. This cause moderate level of problems ine terms of acquisitions.

Also the interest rate scenario in the market is such that it is in the benefit of the current power transmission asset owners like PowerGrid or other players that they securitize the cash flow of their transmission assets instead of seling those assets. PowerGrid is doing this hence the delay in the transfer of remaining 26% in SPVs. I hope this will change if and when the interest rates come down.

@Akash_Shah
Now the question that I have is, who owns the land below the transmission Infra. or Does the transmission company owns it or is that land is under long term lease only?


Also I have many questions about the valuation report… i.e. about rationality
You need to go through the Valuation Report to understand What I am saying.

E.g. The way they Measure Debt Level and Interest Rate (there is no explaination why they choose the value they do choose, at the same time they quote different internal interst rate) and final Cost of Capital. There is lot of missing data or rational behind the numbers they choose in Val Report. They are saying it to be Rs. 85-87/Unit.

Becuase of the flip-flops they are adding accounting gains in some quarters and loss in some others. But these balance sheet entries cause Tax Payment Outgoes (sometimes it saves tax too).

Only upto a limit. PGINVIT has not used its debt capacity, but most other have been using it effectively. So beyond a point, dilution does come into picture

Indigrid is not facing that problem and have been doing acquisition regularly.

No idea

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